Quarterly report pursuant to Section 13 or 15(d)

Available-for-Sale Securities, at Fair Value (Notes)

v3.5.0.2
Available-for-Sale Securities, at Fair Value (Notes)
 9 Months Ended
Sep. 30, 2016
Available-for-sale Securities [Abstract]  
Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block]
Available-for-Sale Securities, at Fair Value
The Company holds AFS investment securities which are carried at fair value on the condensed consolidated balance sheets. AFS securities exclude the retained interests from the Company’s on-balance sheet securitizations, as they are eliminated in consolidation in accordance with U.S. GAAP. The following table presents the Company’s AFS investment securities by collateral type as of September 30, 2016 and December 31, 2015:
(in thousands)
September 30,
2016
 
December 31,
2015
Agency
 
 
 
Federal Home Loan Mortgage Corporation
$
1,808,122

 
$
1,678,814

Federal National Mortgage Association
10,393,094

 
3,602,348

Government National Mortgage Association
235,600

 
691,728

Non-Agency
1,847,809

 
1,852,430

Total available-for-sale securities
$
14,284,625

 
$
7,825,320



At September 30, 2016 and December 31, 2015, the Company pledged AFS securities with a carrying value of $14.3 billion and $7.8 billion, respectively, as collateral for repurchase agreements and advances from the Federal Home Loan Bank of Des Moines, or the FHLB. See Note 15 - Repurchase Agreements and Note 17 - Federal Home Loan Bank of Des Moines Advances.
At September 30, 2016 and December 31, 2015, the Company did not have any securities purchased from and financed with the same counterparty that did not meet the conditions of ASC 860, Transfers and Servicing, or ASC 860, to be considered linked transactions and, therefore, classified as derivatives.
The following tables present the amortized cost and carrying value (which approximates fair value) of AFS securities by collateral type as of September 30, 2016 and December 31, 2015:
 
September 30, 2016
(in thousands)
Agency
 
Non-Agency
 
Total
Face Value
$
14,254,562

 
$
2,634,994

 
$
16,889,556

Unamortized premium
625,519

 
—

 
625,519

Unamortized discount
 
 
 
 
 
Designated credit reserve
—

 
(352,489
)
 
(352,489
)
Net, unamortized
(2,620,684
)
 
(789,425
)
 
(3,410,109
)
Amortized Cost
12,259,397

 
1,493,080

 
13,752,477

Gross unrealized gains
208,319

 
359,748

 
568,067

Gross unrealized losses
(30,900
)
 
(5,019
)
 
(35,919
)
Carrying Value
$
12,436,816

 
$
1,847,809

 
$
14,284,625

 
December 31, 2015
(in thousands)
Agency
 
Non-Agency
 
Total
Face Value
$
8,257,030


$
2,655,381

 
$
10,912,411

Unamortized premium
394,787


—

 
394,787

Unamortized discount
 
 
 
 
 
Designated credit reserve
—


(409,077
)
 
(409,077
)
Net, unamortized
(2,721,979
)

(707,021
)
 
(3,429,000
)
Amortized Cost
5,929,838


1,539,283

 
7,469,121

Gross unrealized gains
98,389


329,206

 
427,595

Gross unrealized losses
(55,337
)

(16,059
)
 
(71,396
)
Carrying Value
$
5,972,890

 
$
1,852,430

 
$
7,825,320



The following tables present the carrying value of the Company’s AFS securities by rate type as of September 30, 2016 and December 31, 2015:
 
September 30, 2016
(in thousands)
 Agency
 
 Non-Agency
 
 Total
Adjustable Rate
$
32,588

 
$
1,545,843

 
$
1,578,431

Fixed Rate
12,404,228

 
301,966

 
12,706,194

Total
$
12,436,816

 
$
1,847,809

 
$
14,284,625

 
December 31, 2015
(in thousands)
Agency
 
Non-Agency
 
Total
Adjustable Rate
$
108,596

 
$
1,673,038

 
$
1,781,634

Fixed Rate
5,864,294

 
179,392

 
6,043,686

Total
$
5,972,890

 
$
1,852,430

 
$
7,825,320



The following table presents the Company’s AFS securities according to their estimated weighted average life classifications as of September 30, 2016:
 
September 30, 2016
(in thousands)
 Agency
 
 Non-Agency
 
 Total
≤ 1 year
$
2,186

 
$
67,171

 
$
69,357

> 1 and ≤ 3 years
102,324

 
241,346

 
343,670

> 3 and ≤ 5 years
5,407,166

 
214,452

 
5,621,618

> 5 and ≤ 10 years
6,923,818

 
957,723

 
7,881,541

> 10 years
1,322

 
367,117

 
368,439

Total
$
12,436,816

 
$
1,847,809

 
$
14,284,625



When the Company purchases a credit-sensitive AFS security at a significant discount to its face value, the Company often does not amortize into income a significant portion of this discount that the Company is entitled to earn because the Company does not expect to collect the entire discount due to the inherent credit risk of the security. The Company may also record an other-than-temporary impairment, or OTTI, for a portion of its investment in the security to the extent the Company believes that the amortized cost will exceed the present value of expected future cash flows. The amount of principal that the Company does not amortize into income is designated as a credit reserve on the security, with unamortized net discounts or premiums amortized into income over time to the extent realizable.
The following table presents the changes for the nine months ended September 30, 2016 and 2015, of the unamortized net discount and designated credit reserves on non-Agency AFS securities.
 
Nine Months Ended September 30,
 
2016
 
2015
(in thousands)
Designated Credit Reserve
 
Unamortized Net Discount
 
Total
 
Designated Credit Reserve
 
Unamortized Net Discount
 
Total
Beginning balance at January 1
$
(409,077
)
 
$
(707,021
)
 
$
(1,116,098
)
 
$
(927,605
)
 
$
(967,368
)
 
$
(1,894,973
)
Acquisitions
(45,398
)
 
(140,318
)
 
(185,716
)
 
(274
)
 
(4,293
)
 
(4,567
)
Accretion of net discount
—

 
50,596

 
50,596

 
—

 
76,861

 
76,861

Realized credit losses
279

 
—

 
279

 
13,376

 
—

 
13,376

Reclassification adjustment for other-than-temporary impairments
(1,226
)
 
—

 
(1,226
)
 
1,742

 
—

 
1,742

Transfers from (to)
70,371

 
(70,371
)
 
—

 
85,767

 
(85,767
)
 
—

Sales, calls, other
32,562

 
77,689

 
110,251

 
282,821

 
227,078

 
509,899

Ending balance at September 30
$
(352,489
)
 
$
(789,425
)
 
$
(1,141,914
)
 
$
(544,173
)
 
$
(753,489
)
 
$
(1,297,662
)


The following table presents the components comprising the carrying value of AFS securities not deemed to be other than temporarily impaired by length of time that the securities had an unrealized loss position as of September 30, 2016 and December 31, 2015. At September 30, 2016, the Company held 1,220 AFS securities, of which 80 were in an unrealized loss position for less than twelve consecutive months and 124 were in an unrealized loss position for more than twelve consecutive months. At December 31, 2015, the Company held 1,181 AFS securities, of which 121 were in an unrealized loss position for less than twelve consecutive months and 182 were in an unrealized loss position for more than twelve consecutive months.
 
Unrealized Loss Position for
 
Less than 12 Months
 
12 Months or More
 
Total
(in thousands)
Estimated Fair Value
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Gross Unrealized Losses
 
Estimated Fair Value
 
Gross Unrealized Losses
September 30, 2016
$
2,122,527

 
$
(12,318
)
 
$
551,086

 
$
(23,601
)
 
$
2,673,613

 
$
(35,919
)
December 31, 2015
$
1,503,939

 
$
(26,984
)
 
$
1,141,839

 
$
(44,412
)
 
$
2,645,778

 
$
(71,396
)


Evaluating AFS Securities for Other-Than-Temporary Impairments
In evaluating AFS securities for OTTI, the Company determines whether there has been a significant adverse quarterly change in the cash flow expectations for a security. The Company compares the amortized cost of each security in an unrealized loss position against the present value of expected future cash flows of the security. The Company also considers whether there has been a significant adverse change in the regulatory and/or economic environment as part of this analysis. If the amortized cost of the security is greater than the present value of expected future cash flows using the original yield as the discount rate, an other-than-temporary credit impairment has occurred. If the Company does not intend to sell and will not be more likely than not required to sell the security, the credit loss is recognized in earnings and the balance of the unrealized loss is recognized in either other comprehensive income (loss), net of tax, or gain on investment securities, depending on the accounting treatment. If the Company intends to sell the security or will be more likely than not required to sell the security, the full unrealized loss is recognized in earnings.
The Company recorded $1.0 million and $1.8 million in other-than-temporary credit impairments during the three and nine months ended September 30, 2016 on one and four non-Agency RMBS, respectively, where the future expected cash flows for each security were less than its amortized cost. As of September 30, 2016, impaired securities with a carrying value of $124.0 million had actual weighted average cumulative losses of 12.0%, weighted average three-month prepayment speed of 6.8%, weighted average 60+ day delinquency of 22.9% of the pool balance, and weighted average FICO score of 666. At September 30, 2016, the Company did not intend to sell the securities and determined that it was not more likely than not that the Company will be required to sell the securities; therefore, only the projected credit loss was recognized in earnings. During the three and nine months ended September 30, 2015, the Company recorded $0.2 million and $0.5 million in other-than-temporary credit impairments on two non-Agency RMBS where the future expected cash flows for the security were less than its amortized cost.
The following table presents the changes in OTTI included in earnings for the three and nine months ended September 30, 2016 and 2015:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2016
 
2015
 
2016
 
2015
Cumulative credit loss at beginning of period
$
(6,710
)
 
$
(6,622
)
 
$
(6,499
)
 
$
(8,241
)
Additions:
 
 
 
 
 
 
 
Other-than-temporary impairments not previously recognized
(1,015
)
 
(238
)
 
(1,307
)
 
(238
)
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments
—

 
—

 
(515
)
 
(297
)
Reductions:
 
 
 
 
 
 
 
Decreases related to other-than-temporary impairments on securities paid down
—

 
—

 
—

 
—

Decreases related to other-than-temporary impairments on securities sold
—

 
361

 
596

 
2,277

Cumulative credit loss at end of period
$
(7,725
)
 
$
(6,499
)
 
$
(7,725
)
 
$
(6,499
)


Cumulative credit losses related to OTTI may be reduced for securities sold as well as for securities that mature, are paid down, or are prepaid such that the outstanding principal balance is reduced to zero. Additionally, increases in cash flows expected to be collected over the remaining life of the security cause a reduction in the cumulative credit loss.
Gross Realized Gains and Losses
Gains and losses from the sale of AFS securities are recorded as realized gains (losses) within gain on investment securities in the Company’s condensed consolidated statements of comprehensive income (loss). For the three and nine months ended September 30, 2016, the Company sold AFS securities for $2.8 billion and $6.6 billion with an amortized cost of $2.8 billion and $6.5 billion for net realized gains of $31.8 million and $63.3 million, respectively. For the three and nine months ended September 30, 2015, the Company sold AFS securities for $1.1 billion and $3.7 billion with an amortized cost of $1.0 billion and $3.4 billion for net realized gains of $66.5 million and $259.8 million, respectively.
The following table presents the gross realized gains and losses on sales of AFS securities for the three and nine months ended September 30, 2016 and 2015:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(in thousands)
2016
 
2015
 
2016
 
2015
Gross realized gains
$
31,942

 
$
75,427

 
$
77,836

 
$
269,314

Gross realized losses
(164
)
 
(8,955
)
 
(14,487
)
 
(9,511
)
Total realized gains on sales, net
$
31,778

 
$
66,472

 
$
63,349

 
$
259,803